Corporate Loan Charge-Offs and Delinquencies Surge

Another Bump Higher

In one of our recent updates on the weakness in the manufacturing sector we have mentioned the surge in the sum of charge-offs and delinquencies of commercial and industrial loans at US banks (hat tip to our friend BC, who inspired the chart below). As we were arguing at the time, this is a sign that inflationary US bank credit expansion to businesses will likely continue to stall and as a result US money supply growth should continue to decelerate.

It turns out that this particular growth rate has recently increased further:

Growth in charge-offs and delinquencies in commercial and industrial loans (black line, left hand scale) continues to accelerate – in spite of the fact that the Federal Funds rate (red line, rhs) has officially not even been hiked yet – click to enlarge.

What makes this chart so interesting is that similar accelerations in charge-offs and delinquencies have previously occurred shortly before recessions, whereby “shortly” is an elastic term: the lead times are obviously varying from case to case. Noteworthy is also the speed of the recent acceleration in this trend. We don’t think this is a good sign for the US economy.

Transportation Sector Woes

Note in this context also that the economically highly sensitive transportation sector has recently been mercilessly stomped on in the stock market. This is a sector in which stock prices are now clearly following the worrisome deterioration in fundamentals.

The Dow Jones Transportation Average has once again broken through technical support levels (there was both lateral and trend-line support at the 8,000 level) – click to enlarge.

Given the highly cyclical nature of this sector, we take its woes as confirmation that the economy is probably far weaker than is generally assumed. As we have mentioned previously, although there is no recession in sight yet in terms of the official definition of same, it appears to us that the loss of momentum in sectors such as shale oil (and commodities more generally) as well as in manufacturing is actually very disquieting. If things were the other way around – weakness in the services sector accompanied by strength in manufacturing – we would be far less concerned about the probability of a recession being fairly imminent.

It is deeply ironic that the Fed is finally about to implement a tiny (and largely meaningless) rate hike, just as this slowdown is taking shape – based on a lagging indicator, that doesn’t look all that great anyway if one looks at it more closely (we are of course referring to employment – see this recent incisive analysis by David Stockman).

Conclusion

More signs that the economy is actually not all that well. It may yet recover on its own (believe it or not, but from a historical perspective the data in their totality are not yet decisive), but we think this is a very low probability scenario at this stage. There is likely already way too much malinvested capital in need of a significant purge.

Moreover, the economy’s pool of real funding has in our opinion been under strain (of varying intensity) since at least the year 2000. Although the pool of real savings cannot be measured, we can make educated guesses about its state by inference from other data points. If money supply expansion in the US does slow down further (as we suspect it will), an economic bust will become a near certainty.